Contrarian hedge fund manager Kass thinks stocks ripe for fall

(Mark Randall, Sun Sentinel )

May 20, 2013|By Donna Gehrke-White, Sun Sentinel

Hedge fund manager Douglas Kass has always been a contrarian, whether it's predicting a "bear" market when the Dow and the S&P 500 both topped new record highs earlier in the week or deciding to put down roots in Palm Beach County, far from most other portfolio managers.

"I am wired as a contrarian so I prefer to stay away from 'Group Think' or as I call 'Group Stink,'" Kass quips.

But Kass has been on the money, from predicting Warren Buffett's Berkshire Hathaway stock would falter to warning Apple stock was overpriced, just before the famed company's stock took a tumble.

Buffet was so impressed with Kass that he invited him to sound off about why investing in Buffet's Berkshire is a bad idea.

Kass, unafraid to be in an Omaha convention hall with so many diehard Buffet fans, was happy to comply earlier this month.

But then he has often taken the road less traveled. He once co-wrote a book with consumer advocate Ralph Nader about Citibank. That didn't hurt his career. He eventually became a senior portfolio manager for the $6 billion partnership, Omega Advisors before he started his own, Seabreeze Partners Management.

He recently answered five questions for the Sun Sentinel.

You've been skeptical on the rising stock market, yet stocks have continued to hit new records. Are you still bearish?

I remain bearish.

The most frustrating part of this year was that our concerns about the sluggish U.S. economy have been relatively accurate. What we missed was the market's willingness to price stocks higher -- even in the face of flat sales and corporate profits that have barely risen about 2.5 percent.

The willingness to pay more for stocks stems from first-quarter earnings coming in slightly better than expected -- not much but maybe by about 60 to 75 cents a share.

That modest rise in earnings doesn't justify the dramatic market advance with the S&P 500 now at more than a record 1650.

As we have noted in the past, the benefits to the Federal Reserve's policy of holding U.S. interest rates to record lows is fading. That policy, in fact, may produce a negative impact on growth -- while savers continue to get robbed.

Meanwhile, dangers grow. According to Merrill Lynch's May global fund manager survey (230 investors with $660 billion in assets under management) released this week, hedge funds are at their highest net long exposure in seven years.

The rest of the year should see slower economic growth that will fail to provide rationale for the recent upswing in stock prices.

The reasons are many: The rebound in the housing market will likely slow. Oil prices have begun to go up. Fighting over the federal budget deficit continues. The profound weakness in the Japanese yen threatens some U.S. exports.

While the job market has improved, that may be because of Super Storm Sandy reconstruction. Moreover, the improvement appears to be mostly in lower-paying jobs.

Finally, interest rates may finally rise later this year if the Fed pauses or tapers off its quantitative easing policy. That might hurt stock prices.

After your appearance at the Warren Buffet annual meeting, what do you think of Buffett and his fund?

I continue to be short Berkshire's stock. I'm concerned over who will replace Buffet and that Berkshire has grown too big to outperform the market as it once did.

I have always worshiped at Buffett's altar. But assessing a stock is different than having a man crush on Warren and being in awe of his accomplishments!

How would you advise people to invest their 401K retirement savings money, given your impressions of an overinflated stock market.

I would have a higher than normal cash position to take advantage when markets ultimately begin to recognize the likely long lasting weakness in the real economy and that quantitative easing is having little impact on the domestic economy.

What's your opinion on bonds – short- and long-term -- given that many are predicting their value will drop once interest rates go up?

I believe that yields in U.S. bonds are at a generational bottom.

I would avoid bonds like the plague and would keep maturities very short. For example if I relied on municipals for income I would keep maturities under seven years or so.